At each stage of the spin-out journey, the financing needs will change. You will need to consider not only the amount and type of financing that is appropriate but also the investor that is providing it. In addition to the investment they provide, investors who have expertise, networks and skills will be more valuable to the business in the long run. The founders collaborate with our Commercialisation Managers to navigate key financing questions and find the solution that best fits their needs.
Spin-outs that have targets for high-growth often use a combination of funding types to allow the business to meet the challenges it will face and to maintain momentum. Ploughshare will assist you in coming up with this growth financing strategy.
At each stage of the spin-out journey, the financing needs will change. You will need to consider not only the amount and type of financing that is appropriate but also the investor that is providing it. In addition to the investment they provide, investors who have expertise, networks and skills will be more valuable to the business in the long run. The founders collaborate with our Commercialisation Managers to navigate key financing questions and find the solution that best fits their needs.
Spin-outs that have targets for high-growth often use a combination of funding types to allow the business to meet the challenges it will face and to maintain momentum. Ploughshare will assist you in coming up with this growth financing strategy.
Knowing how to source and access funding for innovation can be a challenge for any spin-out. Ploughshare has a proven track record of identifying the most relevant public sector financing sources as well as providing support for grant applications.
We also provide unique insight and information on applying for public sector grants and funding sources through our extensive public sector network. Through this network, spin-outs can access advice on applying for a number of funding sources including grants from the Defence and Security Accelerator and equity funding through the UK Innovation and Sciences Seed Fund. This allows the spin-out to de-risk the critical early phases of development to gain market traction and to reach key business milestones for further financing.
“According to our ESG Survey, 52.4% of founders said that they highlight their ESG policies during fundraising meetings, and 42.6% indicated that having policies in place has a positive effect on their fundraising efforts.”
500 Start-ups
This refers to individuals (business angels) or groups of angels (syndicates) who invest in early-stage ventures. Their investment is usually less than a venture capital firm would offer and they will likely have varied interests in the level of involvement in the spin-out.
Typical investment ranges for angel syndicates are from £10,000 to £1 million at the pre-seed and seed stage of a business. Angel investors are often high-net-worth individuals and/or entrepreneurs with business experience.
As angel investors can often offer value beyond their investment, for example, mentoring, skills and contacts, it is often a priority choice of early-stage financing. Syndicates with a pool of angel investors may also have domain expertise and established industry connections. Many angel investors take a hands-on approach to the business to support founders with gaps in knowledge and push the business forward.
Where debt is available to the spin-out this will most likely be in the form of venture debt — a type of loan offered by banks and non-bank lenders that is designed specifically for early stage, high-growth businesses with venture capital backing.
Venture debt should not be seen as a replacement for equity financing, however it provides an additional funding route that may benefit founders who do not wish to dilute their ownership further in the short term. Debt is the least likely form of funding for Ploughshare spin-outs.
Both ESG and impact investing are growing in influence and prevalence. ESG and impact investing are often used interchangeably, but there are key differences of which to be aware.
ESG focuses on the business operations, while impact focuses on the product or services that the business produces. If an investor partakes in ‘ESG investing’, it refers to investing in a venture with ESG standards and protocols. Increasingly, ESG measures are being adopted across the venture investing landscape. Spin-outs which can demonstrate clear ESG alignment and tangible impact will have an advantage in fundraising from a range of investors who factor this into their investment criteria.
Impact investing involves investing in a business whose product or services achieve specific goals that generate positive, measurable social and environmental impact, alongside a financial return. It is sometimes referred to as ‘The Triple Bottom Line’. Venture capital funds, private equity firms, and angel investors or syndicates are increasingly adopting impact investing methods. There are also a growing number of exclusively impact focused investors which operate in the UK. As the spin-outs we support are prioritised in the earliest stages for both their impact and financial return, impact funds will be an increasingly viable source of finance.
Equity is when investors receive a proportion of the shares in return for their investment and therefore own part of the business.
Depending on the level of investment needed and the stage that the business is at, there are multiple types of equity financing. We have described the most common types of financing that founders will want to explore as they start and grow their business.
Founders are often unaware of the dilution effects of equity financing, but understanding the impacts of dilution early on in the process can help founders better plan their financing strategy.
Dilution happens when more shares are issued as part of the next funding round. As there are now more shares which make up the spin-out as a whole, the percentage ownership which the founders and earlier investors have will now be lower. This is often a good thing if the extra funding means the spin-out grows in size and value, therefore neutralising the dilution impact. In some cases it is possible to have anti-dilution provisions, which mean the investors’ percentage shareholding in the business will not be diluted with additional share issues until certain thresholds are met. However, where possible this will be avoided for early-stage funding. See the further reading at the end of this section for more information.
Grants are often provided by the government or the third sector to accelerate innovation and technology in the UK economy.
As this type of financing is non-dilutive and does not need to be paid back, it has significant advantages over other types of financing in the earlier stage of the spin-out venture. Grants can often help to reach key business milestones that make it more viable for the spin-out to attract other sources of finance. The types of spin-outs we support — high potential IP with the potential for wider societal impact — are well placed to benefit from grants. However, grants are typically competitive and are not guaranteed.
Below is selection of sources of public grant finance from which Ploughshare spin-outs have benefitted:
Funding can be provided for businesses with specific areas of innovation interest. Innovate UK provides support in finding the right partners, accessing the right expertise and equipment and connecting with follow-on investors.
Funding amount: Up to millions
JHUB looks for near market-ready technology and is specialised in cutting edge military-based technology. They provide funding to accelerate a pilot for the business which will culminate in a presentation to the UK Stratcom innovation board.
Funding amount: N/A
DASA offers two types of funding: the open call and themed competitions. The open call will welcome innovation that addresses defence and security challenges, whilst themed competitions offer funding for areas of specific government interest at the time.
Funding amount: N/A
This fund aimed at government departments and partner organisations solely for public sector knowledge assets. There are three bands of funding: the explore grant up to £25,000, the expand grant up to £100,000 and the extend grant up to £250,000.
Funding amount: Up to £250,000
The NIHR programme funds researcher-identified topic areas covering health, public health and social care research.
Funding amount: No limit dependent on programme
Seed funding is the initial investment that the business needs to be able to survive through one of the riskiest periods of business development as the spin-out gets off the ground.
This funding will come at the beginning of the spin-out lifecycle once the product has an identified market and a plan is in place for short term growth.
For the majority of Ploughshare spin-outs both pre-seed money and seed money, alongside a combination of other financing (for example, grants), will sustain the spin-out to the next fundable milestone. Ideally, only ordinary shares are issued at seed stage for our spin-outs. Seed funding will usually utilise the Seed Enterprise Investment Scheme and/or Enterprise Investment Scheme (see EIS & SEIS in glossary) and come from angel investment or seed venture capital. Below are more details on the types of seed funding our spin-outs will typically leverage.
Revenue based financing is often viewed as a hybrid between debt and equity. It can take several forms but, typically, the original investment is paid back via royalty payments that vary with fluctuations in the spin-outs performance.
Once the royalty payments reach a certain predetermined value (usually a multiple of the initial investment) the investment is considered to have been paid back. The benefit of this model is that there are no fixed payments and no interest. It also does not give any ownership to the investor and therefore the founders equity is not diluted.
Funding from venture capitalists can be at the beginning of business formation (seed venture capital) or further venture capital funding (growth venture capital).
Funding amounts can vary greatly between seed and Series A but range from an average of £500,000 to £10 million. Venture capitalists are sophisticated and established investors who will conduct rigorous due diligence on the business. Founders who approach venture capitalists must be “investor ready.
Strong venture capital investors can bring support through large rounds of follow-on funding and provide significant expertise to help the spin-out grow. Raising venture capital funding also requires more time and resources, in particular from the founder, so spin-outs must consider their readiness before embarking on a fundraising process targeting venture capital
Presymptom Health — Ploughshare Innovations, Defence Innovation Unit, UK Innovation & Science Seed Fund
Sentinel Photonics — Ploughshare Innovations, Defence and Security Accelerator
Claresys — Downing Ventures, UK Innovation Science and Seed Fund
SEED STAGE FUNDING
UNDERSTANDING DILUTION:
VENTURE CAPITAL FUNDING
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